Analysis: Shippers need to do their homework on freight pay

Thursday, April 04, 2013

The news this week that freight payment and audit services provider Trendset has been beset by internal embezzlement and fraud comes at a particularly interesting point in the evolution of the freight payment and audit industry.
In March, the freight payment consultancy Quetica and law firm Balch & Bingham released a white paper that encourages shippers to perform due diligence when it comes to selecting an external freight payment and audit services provider.
It should be noted that the white paper, Getting It Right: Due Diligence and the Outsourcing of Freight Audit and Payment, came out prior to news of Trendset’s problems. The authors of the report - Quetica managing director Richard Langer (who created the industry’s pioneering PowerTrack network) and Dean Calloway, a partner in Balch & Bingham’s Atlanta office – emphasized shippers should also ensure controls are implemented to safeguard the funds they are entrusting to these third parties.
“Many shipper-provider agreements entrust the provider with significant amounts of funds advanced by the shipper for the purpose of paying the shipper’s carriers,” the paper said. “Yet few shippers require providers to establish formal escrow accounts for their funds even when the amounts advanced by the shipper to the provider run into the millions.”
Indeed, American Shipper pointed out in its initial coverage of the Trendset ordeal that shippers often think only of the fees they pay to their vendor as being potentially vulnerable, when in reality, the larger sum that could be vulnerable is the millions of dollars the shipper passes on to the vendor for the purposes of paying its carriers.
“A critical factor in any successful relationship between a freight payment and audit provider and a shipper is visibility,” Langer told American Shipper in an interview. “The ability of a shipper to monitor the application and disposition of its funds is key to avoiding this kind of circumstance.”
The total sums affected by the alleged malfeasance within Trendset are unknown as yet. In a letter to customers in late March obtained by American Shipper, Trendset Chief Executive Officer Gary Selvaggio said the FBI had conducted a forensic review, but it remained unclear exactly how much money was taken, as well as exactly how Trendset customers may have been impacted. What is certain, according to the letter, is that money sent to Trendset to pay bills to carriers on behalf of its customers was affected.
“Unfortunately, the damage was not limited to the embezzlement. This person had access to and authority over certain accounts and transactions through which we make payments to freight carriers on behalf of our customers,” Selvaggio wrote. “These accounts and transactions were not subjected to the rigorous financial controls which should have been in place."
Later in the letter, he added: “We are actively working to pinpoint the precise causes of this error, but deficiencies in the internal controls are constraining our ability to reconcile the accounts.”
Langer said safeguards need to be addressed in the contract process.
“The circumstances warrant a re-examination of the kinds of protections and safeguards shippers should expect when contracting with any freight payment and audit provider,” he said. “Since shippers contract with a new freight payment and audit provider infrequently, they often do not have the in-house domain expertise to effectively evaluate and manage their risks in the procurement process, overlooking normal industry practices.”
Calloway, in the same interview, emphasized the point.
“This kind of circumstance underscores the need for shippers to make sure their expectations regarding the security of their assets are addressed during the contracting process,” he said. “It is important that any affected shippers consult with counsel and take the appropriate steps to protect their interests.”
Shippers face a cold reality when they decide to take their freight payment process to an external vendor. They are, in essence, relinquishing their checkbook to an entity outside their own four walls.
For many, this makes sense, as the task of verifying the accuracy of invoices, then cutting the corresponding checks is too large a burden. For others, the ability to delay their payment to carriers, while ensuring the carriers get paid in a timely manner, is the primary benefit. Still others see value in using the automation and data management provided by sophisticated third party vendors, so their payment process, rich in valuable data, is cleaner, more organized, and more usable in the broader procure-to-pay process.
Still, the vendor landscape in freight payment and audit is vast and confusing. There are trustworthy bank and non-bank affiliated vendors, each of which have a legal requirement to safeguard the funds with which they are entrusted. What Langer and Calloway advocate is that shippers vet their prospective vendors thoroughly, regardless of their affiliation. While it is true that bank-backed vendors have certain regulatory mandates that non-bank vendors don’t, many non-bank vendors realize this and provide extra safeguards that approximate the benefits of the bank-backed peach of mind.
Roxane Kramer, chief financial officer for payment vendor Data2Logistics, told American Shipper that it pays for insurance with the Federal Deposit Insurance Corp. (FDIC) in excess of 100 percent of the payments it manages to assure clients they would recoup all of their money in the event of a problem.
Incidents like that at Trendset can have the effect of tarnishing the reputation of the entire freight payment industry, and particularly those vendors not perceived to have the advantage of being a bank. That’s a tough hurdle to overcome. Kramer noted while Data2Logistics places a premium on financial safeguards, she suspects not all of its competitors do.
And therein lies a problem. While the gamut of specialized vendors is quite interested in differentiating themselves from one another – in essence, portraying their solution as the best and most trustworthy out there – the reality is that all vendors are hurt when something goes wrong at one vendor.
Shippers can easily retreat to paying bills through their broader enterprise resource planning (ERP) platforms, or even doing it in-house. The financial gains of paying through a vendor can quickly be forgotten if there’s trepidation about the safety of vast sums earmarked for carrier payment.
What this leads to is the need for better market regulation. In many ways, the freight payment and audit industry is still the Wild West. Shippers often use small, unregulated entities to process big dollar amounts. Yet they wouldn’t put a similar amount of money in a small, unregulated bank as a deposit.
If the industry is better regulated, the strong and trustworthy vendors – both banks and non-banks – all stand to gain. And the vendors lacking the internal controls to ensure that nothing happens to the money they are entrusted with (and lacking the ability to repay any money lost) would fall by the wayside.
This isn’t the first incident to tarnish the still nascent freight payment industry. Several years ago, Cardinal Health sued its vendor, nVision, for systematically overcharging it fees. The details of that case were not like the alleged malfeasance at Trendset, but the overarching issue is the same. A shipper only knows a vendor it is sending money to as well as it has researched that vendor. And its money is only as safe as the controls it puts in the contract upfront.
The sooner shippers start treating freight payment like the financial transactions they are, the more vendors will be held accountable. - Eric Johnson